Collection from debtors

The correct answer is: B. Increases current ratio

A current ratio is a liquidity ratio that measures a company’s ability to pay its short-term obligations. It is calculated by dividing a company’s current assets by its current liabilities.

When a company collects from debtors, its current assets increase. This is because cash is a current asset. As a result, the current ratio increases.

The other options are incorrect because:

• Option A is incorrect because collection from debtors increases current assets, which would increase the current ratio.
• Option C is incorrect because collection from debtors increases current assets, which would increase the current ratio.
• Option D is incorrect because collection from debtors does not affect the solvency ratio. The solvency ratio is a measure of a company’s ability to pay its long-term obligations. It is calculated by dividing a company’s long-term assets by its long-term liabilities.